Mike Cagney, Co-founder and CEO of Figure Markets, who also founded SoFi, has outlined transformative changes on the horizon for financial markets driven by upcoming stablecoin legislation and blockchain innovations.
These developments, expected to take shape by the August recess, could redefine the banking system, credit markets, and capital allocation, with far-reaching implications for both traditional finance and decentralized ecosystems.
Cagney predicts that stablecoin legislation will categorize stablecoins into three distinct groups: bank coins, yielding coins, and Tether.
Bank coins, such as USDC and JPCoin, will be non-interest-bearing and regulated under the new legislation.
Yielding coins, classified as securities, will fall under SEC oversight, while Tether may be excluded from U.S. markets due to its unregulated nature.
This framework aims to bring clarity and structure to the rapidly evolving stablecoin landscape, ensuring compliance while fostering innovation.
A critical outcome of this legislation will be the integration of stablecoins into the U.S. payment ecosystem.
Banks are expected to develop payment rails for bank coins, enabling seamless transactions.
Cagney emphasizes the importance of bank participation, noting that disrupting the U.S. payment system without it would be nearly impossible.
Figure Markets and others are advocating for yielding coins to operate on these rails, potentially expanding their utility as payment instruments.
This could lead to a future where self-custodied yielding stablecoins rival traditional bank accounts, offering consumers the ability to earn interest and make everyday purchases, like buying coffee, with ease.
However, this shift poses risks to the banking sector.
Mike Cagney highlights the fragility of bank deposits, which surged from $13.5 trillion in 2020 to $18.2 trillion in early 2022 during the COVID-19 pandemic, only to drop to $17.2 trillion by early 2023.
This 6% decline triggered credit market disruptions and bank failures, such as Silicon Valley Bank and First Republic Bank.
If yielding stablecoins siphon even a modest portion of deposits, the resulting outflow could destabilize credit markets and strain the banking system further.
Figure Markets is addressing this challenge strategically.
In February 2024, the company launched YLDS, a public blockchain-based stablecoin that pays interest.
YLDS is designed for diverse use cases, including exchange collateral, DeFi applications, cross-border remittances, and payments.
By promoting YLDS, Figure is contributing to the potential deposit flight from traditional banks.
Simultaneously, the company is developing Democratized Prime (DP), a platform that enables peer-to-peer lending against blockchain assets.
DP uses hourly Dutch Auctions and DART (a UCC Section 8 security perfection mechanism) to secure loans, disintermediating traditional capital allocators like banks and prime brokers.
Figure is also transitioning its $13 billion in real-world asset (RWA) total value locked (TVL) onto DP, starting imminently.
Cagney sees DP as a solution to mitigate the credit crisis that could arise from stablecoin-driven deposit outflows.
By allowing individuals and entities to lend their stablecoins directly on DP, the platform aims to democratize capital allocation, redirecting economic benefits from banking institutions to the public.
If successful, DP could stabilize credit markets by providing an alternative funding mechanism.
Failure to adapt, however, could lead to significant challenges for the financial system.
For Cagney (and other digital assets industry participants), these developments represent an opportunity to level the financial playing field, a key reason for his transition from fintech to Web3.
As stablecoin legislation and blockchain innovations continue to reshape the web3 space, the next few years could be a pivotal time-period in the evolution of global finance.